Looking back...and ahead
By James D. Butler - October 1, 2008
Legendary golfer Ben Hogan once said that the secret to the game is “in the dirt.” By that he meant the nitty gritty of digging into the details. This column usually focuses on the “dirt”–the details of fractional investments. But on the occasion of this magazine’s fifth anniversary, it’s worthwhile to consider the big picture–where the fractional jet ownership business has been and where it’s going.
In some ways, the industry looks much like it did when BJT published its first issue in October 2003. The biggest fractional companies remain NetJets, the market leader; Flexjet; Flight Options, which merged with TravelAir; and CitationShares, which was a relatively new entrant back in 2003.
Yet, as the fractionals have struggled to achieve profitability, the business model has continued to evolve–mostly to the detriment of shareowners. Early on, the fractional providers touted cost certainty as a great benefit of share ownership. They would do all the work, managing and operating the aircraft, and take the risk of operating-cost increases above an annual cap of 3.75 percent, as well as the risk of fluctuations in the market value of the aircraft.
Slowly but surely, though, the fractional providers have shifted the variable-cost risk to the owners. Base rates for fuel have been kept artificially low while burn rates have been set artificially high, such that fuel surcharges have become a profit center for some as well as a way to recoup positioning costs (despite sales pitches promising that owners don’t incur such costs). Additional surcharges for insurance and pilot salaries have sprouted. Guaranteed minimum share repurchase prices have been abolished. Over time, cost certainty for owners has been substantially eliminated from the fractional model.
Flyers have been willing to pay higher rates to fractional jet card programs to avoid the steep capital investment and variable-cost risk that fractional ownership entails. Meanwhile, lower hourly rates and zero capital costs have been attractive to those willing to fly in block charter programs on networks of mostly older aircraft. And we are starting to see the emergence of regional air taxi services that fly short hops on discrete routes using the new very light jets.
Fractional providers have responded to customer needs in some ways–extending primary service areas, eliminating ferry fees, introducing distance-based pricing, offering discounts in exchange for owner acceptance of more restrictive travel dates, eliminating remarketing fees and permitting owners a limited ability both to sell unusued hours and to purchase concessions such as short-leg waivers. However, no provider has packaged all these benefits into a single program.
At the same time, the providers have made it more difficult for owners to sell their shares to third parties–effectively suffocating any secondary share market.
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